Guest Article

(From the June 18, 2012 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Change in Social Security Offset Is Not a Prohibited Cutback, Appeals Court Rules

The 11th Circuit Court of Appeals ruled that an amendment changing the formula for calculating the social security offset in a defined benefit plan did not violate the anti-cutback rule under ERISA section 204(g)—which prohibits plan amendments that reduce a participant's accrued benefit. The affected participants were not yet eligible for a retirement benefit under the plan, so the more favorable preamendment social security offset formula was not part of their accrued benefit, the court found. As such, the amendment was not an impermissible cutback under ERISA section 204(g), even though it meant the participants would receive a lower monthly benefit if they continued to remain employed and eventually became entitled to a retirement benefit under the plan.

The plaintiffs in the case alleged that a plan amendment adopted in 2007 violated the anti-cutback rule under ERISA section 204(h) because it put into effect a new formula for calculating the social security offset for those participants who had not yet reached age 52, the early retirement age under the plan. The plan provided two types of benefits: retirement benefits for those who retired directly from the plan sponsor on or after age 52, and deferred vested benefits for those who terminated employment after 5 years of service for any reason other than retirement or death. Before the 2007 amendment, the social security offset for retirement benefits was calculated using the participant's 2003 level pay from July 1, 2003 to December 31, 2005 and no pay thereafter. The offset for the deferred vested benefits was less favorable, using the participant's 2003 level pay until the participant attained age 65. (The assumption of future income meant future Social Security contributions, which would result in a larger social security offset and a smaller plan benefit.) The 2007 amendment essentially eliminated the difference for participants who had not yet reached age 52. It applied the less favorable offset formula to both retirement and deferred vested benefits.

The named participant, who had not yet reached age 52 at the time of the 2007 amendment, was a thirty-year employee of the plan sponsor. In a proposed class action complaint against the sponsor, she alleged a violation of the ERISA anti-cutback rule. The district court dismissed the case for failure to state a claim. On appeal, the 11th Circuit Court of Appeals affirmed that decision. It explained:

Finding that the more favorable offset was not part of the plaintiff's accrued benefit, the court ruled that the ERISA anti-cutback rule did not apply and it affirmed the dismissal of the case.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.220.2692, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2012, Deloitte.